In the UK, do I need to pay income tax if I only work for 1 year and I don't exceed the yearly allowance?

Question

I am getting paid 17.5k (with 4% going to pension) during my work placement (that's part of my studies). It started in September 2019 and it ends in August 2020.

Since the tax year breaks in April, I end up earning 10.2k in the 2019-2020 tax year and 7.3k in the 2020-2021 tax year.

In both tax years, I am earning under the yearly allowance of 12.5k. Shouldn't I be exempt from paying any kind of income tax? It seems like HMRC is taxing me as if I earn these money over a normal tax year.

Prior to this job, I did earn 4.5k during the summer which takes my earnings to 14.7k, but I'm paying tax as if I was earning 17.5k a year. My job during the summer didn't provide me with a P45, and I told my current employer several months ago that I would have the other job before starting with them. My tax code now is 1250L M1.

Answer 1

UK tax withholding (PAYE) is normally calculated on a cumulative basis. If April is month 1, May month 2, etc, then the cumulative tax allowance you have in month n is n/12 times the annual personal allowance. If your pay periods aren't months, the same logic applies but it'll be n/52 for the nth week of the year, etc.

In each month, your employer should then look at the amount you've earned year to date, compare it with the cumulative tax allowance, and work out how much tax you should have paid so far this year. They then look at the tax you had paid up till the previous month and subtract that, to tell them the tax you should pay for this month. So in practice with the cumulative basis, you ought to get the benefit of any unused tax allowance in the year to date.

However, in your case you have a "non-cumulative" tax code, signified by the 'M1' at the end. This is probably because you declared a previous job but didn't provide your new employer with a P45 they could use to calculate your cumulative tax properly. With the non-cumulative tax code, they just give you 1/12th of the allowance each month, i.e. they end up working out the tax as if you are getting the same salary for the whole year.

Two things you can try to do now:

• Get a P45 from your previous employer. By law they should give you one.
• Contact HMRC, explain the situation, and ask their advice. Perhaps they'll help you chase up the P45, or maybe they can send an updated tax code to your current employer. In principle they ought to have the details of your previous job and be able to work out a tax code that will result in the right withholding, at least by the end of the year.

If the situation doesn't get resolved before, then you should be able to contact HMRC at the end of the tax year to organise a refund. B.Liu pointed out in a comment that if you don't contact them they ought to send you a P800 assessment anyway by the end of November 2020 to sort it out.

For next tax year, you should automatically reset to a standard cumulative tax code, and you will get your salary withheld as if you would be working all year. Once you stop work, you can claim back the overpaid tax using a P50 form. If you stop work because you are leaving the country, you can use form P85.

You can also check HMRC's view of your tax at this page, once you're setup for online access.

Answer 2

Unless you are self-employed, most countries already withhold tax from everyone's paycheck. According to UK tax rates, England, Wales and Northern Ireland will charge a 20% tax rate on £0–£46,350 above the personal allowence, and the tax charged is withheld by the HMRC.

You have to submit your tax to claim those tax paid in advance. Usually, tax is reconciled on a yearly basis, you should never mix them up. For the UK, if one does their Self Assessment tax return online the deadline is 31 January in the following year. A late submission penalty is charged if you submit after the deadline. For non-Self Assessment taxpayers (e.g. those on Pay As You Earn (PAYE) only), HMRC will usually do that for you and notify if you have over/underpaid by the following November.

The reason why the withholding tax is higher than you anticipate because it is calculated base on a fix high bracket formula. E.g. if April your income is 4k, the following will show a draft idea how it is calculated.

£4000 x 12 month = £48000.  
£46,350 tax = 20% (£9270),  £1650 tax = 40%(£660). 
prorated by 12 months  (£9270 +£660) / 12 =  £827.5

Assume your 2019 total net income is 14.7k, minus the personal allowance of £12,500, the amount will be taxed is £(14700-12500) = £2200 (20% tax) = £440.

The more item you can find to be deducted, the more tax refund you will get.

Note:

Some people have pointed out that anyone that earn below the taxable allowance shouldn't go through the trouble to redeem the tax refund. this is possible if the paycheck is below £1041.66.